Will Johnson & Johnson (JNJ) Take M&A Action in 2016?

investTony Daltorio:  One of my favorite companies is Johnson & Johnson (NYSE:JNJ), the world’s largest health care corporation.

I’ve always considered the company almost a health care ETF with its three main divisions – consumer products, pharmaceuticals and medical devices. It also pays a decent dividend – about 3% – that grows annually.

J&J is also a consistent earnings producer. Its latest quarterly results were again very good, despite the headwinds from a too strong U.S. dollar. The good results boosted the stock nearly 8% last week. It’s now positive for the year, which is more than most stocks can say.

It’s steady and boring, almost Warren Buffett-like. In the words of CEO Alex Gorsky, J&J’s “broad-based structure has helped us deliver strong, consistent and sustainable financial performance.”

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Activists Circle

But in today’s investing climate no one likes tortoises. Everyone likes hares that they dream will race higher in price. So the activists have begun circling Johnson & Johnson.

The lead activist is Artisan Partners, which manages $100 billion in assets. It owns a $480 million stake in J&J.

Artisan describes Johnson & Johnson as being a poor performer for years. It wants the company to split its three main divisions into three separate companies. Artisan says this move would unlock $90 billion in value for shareholders.

J&J’s Gorsky counters by telling Reuters that “because of our broad base across health care, we are uniquely positioned to be a partner of choice” with other health care firms.

The company believes its conglomerate structure makes it perfectly positioned for the new cost-cutting realities in health care. It believes it can offer an overall lower cost, for example, to a patient that is having a hip replacement.

I’m sure Artisan and the other activist investors see the roughly $18.5 billion of cash that J&J is sitting on too. I’m sure the activists are dreaming of huge stock buybacks.

JNJ

Source: Bloomberg

J&J’s Cash Hoard

But Johnson & Johnson saved that cash to invest into its business lines. And with biotech and related stocks down big so far this year, J&J is certainly on the prowl.

Its CFO, Dominic Caruso, told the Financial Times, “We are actively looking for the right opportunities … but we’re patient. We’ll only act when we see the right value-creating deal at the right price with the right partners.”

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